Value averaging (VA) is a proposed improvement over dollar cost averaging (DCA). Contrary to DCA, which accumulates a fixed cost each period regardless of the underlying market price, VA attempts to accumulate a fixed value each period. In practice this means VA accumulates more shares when the market price is lower than some target and accumulates less, or even sells off, shares when the price is higher.

VA is a very appealing investment strategy, both intuitively and theoretically. It attempts to implement the old adage of “buy low, sell high” in a passive and mechanical manner. Unfortunately, in order to outperform other passive investment strategies like DCA, it requires knowing how to set a portfolio target for each period.

Setting this target is exactly price forecasting. If we had a method to reliably forecast prices even \(50.1\%\) of the time, we would become extremely wealthy without needing to resort to VA or DCA. In practice, this target will either be too high causing us to waste money by purchasing overpriced shares, or too low causing us to miss out on potential upside.

Avoiding snake oil: Many books and blogs which tout the dominance of VA over DCA set very conservative price targets, such as the total amount of capital invested. In such cases, VA will have a higher rate of return compared to DCA, but much lower total return, which is ultimately what we care about.